Research Note—When Is Versioning Optimal for Information Goods?

Abstract

T his paper provides insights about when versioning is an optimal strategy for information goods. Our characterization of this class of goods is that variable costs are invariant with quality, including the special case of zero variable costs. Our analysis assumes a monopoly firm that has an existing product in the market and has an opportunity to segment the market by introducing additional lower-quality versions. We derive a simple decision rule for determining the optimality of versioning based on the solution to a single-product maximization problem. Versioning is optimal when the optimal market share of the lower-quality version, offered alone, is greater than the optimal market share of the high-quality version, offered alone. A firm can profitably employ versioning for an information good if it can design the lower quality in a way that, relative to their valuations for the high-end version, high-type consumers have a lower relative valuation for the lower quality than do low-type consumers. When variable costs increase, a firm that offered only one product version need not consider adding another version. When variable costs decrease, the firm should explore adding a lower-quality version.

Technology Mergers and Acquisitions in the Presence of an Installed Base: A Strategic Analysis

“…This result parallels Proposition 2 of Bhargava and Choudhary (2008), which shows that a monopoly may not want to version an information product when consumers are homogeneous. Here, as we shall see in Section 4.3, specifically, Proposition 7, other than not wanting to version, a vendor may even be willing to pay (acquire a competitor) to shelf the old product.…”

“…Another closely related stream of work studies versioning of software or information products (Chen and Seshadri, 2007;Bhargava and Choudhary, 2008;Boulding and Christen, 2009;Choudhary, 2010;Dogan et al, 2011;Calzada and Valletti, 2012). The 2 For example, after OS/2 was withdrawn from the operating systems market in 2006, Microsoft faced a sizable pool of consumers who had been using OS/2 in their computer systems.…”

“…When this happens, all consumers will own the old product in period 1. The problem will degenerate to a standard multi-period pricing problem with heterogeneous consumers (see, for example, the analysis in Acquisti and Varian, 2005;Bhargava and Choudhary, 2008;Choudhary, 2010).…”

“…For analysis of multi-period pricing of information goods with heterogeneous consumers, see Bhargava and Choudhary (2008) and Choudhary (2010). An extreme strategy for the entrant is to wait for the old product to retire before selling the new product in period n for consumers to use it in just one period.…”

IPhone or Kindle: Competition of Electronic Books Sales

“…Previous research in economics often applies Hotelling's approach to model competition, which assumes that consumers' valuation lies on a continuous base. In the research of competition information goods sales, Bakos and Brynjolfsson (2000) discuss several different types of competition, including upstream and downstream, and bundler and single information good (Bhargava and Choudhary 2008). Another research stream related to our work is optimal pricing of information goods.…”